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Financial and Production Integration in the Macroeconomy

Author

Listed:
  • Emanuele Brancati
  • Qingqing Cao
  • Raoul Minetti
  • Nicholas Jaehyun Yi

Abstract

We study how the integration between the financial sector and the production structure influences business cycle transmission. In a dynamic economy where banks provide asset-based finance to supply chains, we find that integration along an extensive margin, in the form of firms' ability to borrow from banks specialized in different supply chain segments, amplifies negative banking shocks. In contrast, integration along an intensive margin, in the form of greater diffusion of bank factoring and invoice discounting, mitigates the transmission of banking shocks. A quantitative application to Italy reveals that the destabilizing effects of bank-supply chain integration can prevail when inter-firm commercial linkages are underdeveloped. The predictions are consistent with bank-firm matched data from Italy.

Suggested Citation

  • Emanuele Brancati & Qingqing Cao & Raoul Minetti & Nicholas Jaehyun Yi, 2026. "Financial and Production Integration in the Macroeconomy," CIMEO Working Paper Series 198, Centre for Investigation and Modelling of Experimental Observations (CIMEO).
    • Handle: RePEc:ter:wpaper:00198
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    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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